Past performance doesn't predict future returns, but these funds all have virtues that give them a leg up.
Get mutual fund and stock information from our analyst team delivered to your e-mail inbox every Tuesday. Sign up for our free Investment Insights e-newsletter.
At the risk of stating the obvious, the past decade has been a bad one for stocks. At this point, the S&P 500 Index is essentially flat over the past 10 years. As real as it feels to all of us now, evidenced by the continued lack of investor flows into equity funds, it's an unusual occurrence: A look at rolling 10-year returns since early 1980 shows that the S&P 500 has recorded negative 10-year returns only about 6% of the time since then; all of the occurrences have been in the past couple of years.
Investors should be willing to consider stocks today--based on a variety of indicators, including valuations for large-cap stocks and the current, low level of interest rates. But assessing funds' 10-year returns is hardly inspiring. Sure, there are a couple of no-brainers at the top of the list: Fairholme Fund
In an attempt to gauge investment acumen over a more normal long-term period for stocks, investors can extend their evaluation period. Try 15 years, which includes two bull phases for stocks as well as two bear periods. Overall, the S&P 500 Index gained an annualized 6.74%. While that's still below the long-term historical range of 8% to 10%, it's at least respectable.
We were happy to find a number of equity funds that have had great 15-year performance records. Their returns, though, aren't their most-salient points; rather, solid investment processes and stable managements have proved to be important virtues.
The Delafield Fund
First Eagle Fund of America
Both The Delafield Fund and First Eagle Fund of America ply a stock-picking approach, looking for special situations among stocks. Often, there are concerns or uncertainties, such as a corporate spin-off, management change, or other restructuring that led to a mispricing in the markets. Neither fund is slave to an index. In fact, both The Delafield Fund and First Eagle Fund of America have largely avoided financial stocks altogether. According to First Eagle's managers (who work for subadvisor Iridian Asset Management), such companies are out of their competency core--and they don't think they need them to succeed. True, they invest in smaller companies, which has provided a tailwind over the past 10 years, but they've also been successful by simply keeping their noses to the grindstones, tuning out noise in the markets, and sticking to what they know. If these funds were cheaper, they'd number among our Analyst Picks.
Brown Capital Management Small Company
Even more so than the two above-named funds, this one focuses on small companies, and so has had an advantage of late. However, this one hardly resembles any small-cap index and could not be described as representative of the small-cap market. Instead, it maintains one of the small-cap categories' more-compact portfolios with fewer than 50 stocks, and it has long concentrated its holdings in the technology and health-care sectors. The fund's turnover rate is regularly less than 20%, and the managers thus often hold on to small companies as they grow into larger ones, as long as they sustain their competitive advantages. It bought Dolby Laboratories
Yacktman has recently shown what can happen when you are dogged about valuation but bold about portfolio construction. A lack of financials and a regular cash stake helped this fund in late 2007 and throughout 2008, but it's hardly a wallflower. Managers Don Yacktman and Stephen Yacktman followed that performance with a 59.31% gain in 2009's recovery. That year, the Yacktmans' nose for cheapness led them to a number of media companies, and the two loaded up. Other winners included long-term holding Americredit, which took up more than 6% of assets at various points during that year. Yacktman's approach can backfire, too--it stunk in the late 1990s and was one of the few U.S. stock funds to post a double-digit loss in 1999--but those who can adopt a long-term investment horizon have a solid value hound here. One other note: Over the past 10 years, management responsibility has gradually shifted from Don Yacktman to Stephen Yacktman.
Sequoia, at more than $3 billion in assets, is hardly a hidden gem. But considering its powerful long-term, risk-adjusted performance record, its experienced management team, and its straightforward stock-picking approach, it's tough to understand why it isn't raking in new money after reopening in 2008--considering it had been closed for the previous 25 years. Sequoia reopened because it saw opportunities in the wake of the most-recent bear market and thus spent a good deal of its cash hoard--on both new stocks and existing holdings. Cash is back up to 20% of assets now, so there is a risk that it closes again, perhaps sooner rather than later. Like Yacktman, this one posted a double-digit loss in 1999, so investors should expect it to look out of step at times, but this Analyst Pick is an easy choice.
Bridget B. Hughes, CFA, is an associate director of fund analysis with Morningstar.